LCD News Today, Europe: Feb. 18, 2022

European secondary loans came under further pressure this week in what could be a signal for a wider market repricing.

This week's falls took the average bid on the S&P European Leveraged Loan Index back to levels last seen in early 2021, closing at 98.02 on Feb. 17. This softness means the index has now lost a point from its January high, while year-to-date returns have turned negative at -0.24% by Feb. 17 close.

While lower prices were primarily street-driven, sources reported an uptick in selling — though this remains orderly, according to sources. "We have seen small client-selling but not too much on the whole," one manager said.

In a yield-focused market, it is lower-margin names that continue to fare worst, down 1-1.5 points on the week. Nord Anglia Education Inc.'s E+325 term loan due 2024, for example, is now bid at about 98.5, while Flora Food Group/Upfield's E+350 loan continues to feel the heat and is now at a 93.5 bid, down at least 3 points on the month.

The results season also continues, and while investors said these numbers are not delivering too many surprises, the outlook from management is increasingly cautious. Among those to disappoint, GenesisCare's euro E+475 term loan was down roughly 6 points on the week, crashing into the mid-high-80s after a poorly received update, according to sources.

The Australian firm has been under pressure since 2021, with S&P Global Ratings downgrading the group in November 2021 to CCC+ from B on weaker earnings and cash flow. GenesisCare provides oncology services and experienced disruption to hospitals during the COVID-19 pandemic, while its acquisition of 21 Century Oncology in the U.S. has not met expectations, investors said. Moody's downgraded the firm to B3 on a negative outlook in November 2021. GenesisCare is owned by doctors and management (38%), alongside China Resources Group (41%) and KKR (21%).

Even more dramatic was Schur Flexibles, which saw its term loan due 2028 fall from par at the start of the week into the 60s, before settling in the mid-70s. The fall came as the company said — in what is believed to be its first communication with its syndicate since the loan allocated in September 2021 — that it hired advisers ahead of a potential restructuring, according to market sources. These sources added that the sponsors have provided a €23 million loan to support liquidity needs.

Recent roster

Among the recent deals, B/B2 rated Autoform's E+362.5 term loan is now marked in a 99.125/99.750 market, from 99.750 reoffer on allocations in the third week of January. More-recent deals are holding up better, with Cheplapharm's E+400 term loan refinancing opening in a 99.50/100 market before settling to be wrapped near 99.50 reoffer. Cerba's E+400 TLC, meanwhile, stayed firm to be bid at reoffer this week in a 99/99.50 market.

The latest stepdown in prices means that loans' relative-value opportunity against bonds is subsiding as yields from the two products once again converge. Switch-trades from CLOs are understood to have provided decent support for single-B high-yield names, though traders agree this technical driver is now probably at an end as managers have largely filled their fixed-income buckets. "I think lower-rated bonds look expensive against double-Bs which have sold off on duration, and this is partly explained by the CLO technical," said one manager.

The speed of the market correction raises the question of whether loans could once again become a buying opportunity. Looking at the factors in play, CLO formation continues and triple-A liabilities have not shifted, even if there are signs of stress further down the capital stack. "As an outright asset class you would have to say loans are starting to look interesting," said one account, who nevertheless cautioned it is unclear whether managers have completed the selling and rebalancing of their portfolios away from lower-margin names.

Either way, the sell-off is clearly having an impact on primary deals. Altadia, for one, priced its €1.2 billion buyout loan last night wide of initial talk at E+475, with a 0% floor offered at 98.50. The deal opened at reoffer in a 98.50/98.75 market, and investor sources put the final result down to both this particular credit and the wider backdrop. For their part, underwriters will be hoping that both Cerba and Cheplapharm at E+400 offer the more pertinent benchmark — even if the week's latest stepdown means a push towards E+425 cannot be discounted. "The outlook for primary pricing is not clear and won't be until there are more launches from large single-B credits," said one manager.

Story links

Leveraged loans
Altadia prices €1.2B buyout loan; terms

CLOs
Jefferies prices €410M Cairn CLO XV

Secondary markets
Standard Profil bonds rise on RCF lifeline
Schur Flexibles term loan plummets as company hires advisers

Trends & Analysis
Private debt structure worked in pandemic, but true test remains